Lloyds TSB warned yesterday it will take a £300m hit next year as a result of changing the terms of the insurance it sells customers that enables them to pay off loans after loss of income.

The high street bank, in the throes of taking over its troubled rival HBOS, also provided further evidence of the worsening economy by revealing it had experienced a 100% rise in unemployment claims on its payment-protection insurance since the start of the year. Government figures show unemployment has risen 25% in the same period.

Lloyds TSB also admitted it would need to take a charge this year of £120m to cover the cost of helping the financial services compensation scheme pay savers of collapsed banks and HBOS revealed its bill would be £200m. The levy is based on the size of their savings books.

Adding to the woes for the banking sector, knocked hard by the surprise profits warning from HBOS, Lloyds said it was writing off its £30m share stake in Bradford & Bingley after its part-nationalisation two months ago.

Shares in Lloyds slumped 18% after HBOS's trading update. Shares in HBOS were down by almost a quarter.

Despite the warning of a sharp deterioration in trading in the past two months at HBOS, Lloyds insisted that its performance "was broadly consistent" with the analysis it conducted in October when it cut its offer for the bank from 0.8 of its shares for each HBOS share to 0.605.

By making changes to the way it sells the once lucrative payment-protection insurance, Lloyds is responding to criticism from the Competition Commission, which had called for a ban on banks charging an upfront fee that is added to the debt.

Lloyds will now charge a monthly premium, which it eventually expects to offset the reduction of income in 2009 over the coming three years.

The commission has calculated that consumers are overcharged by £1.4bn because of lack of competition but Ian Larkin, managing director of Lloyds TSB consumer banking, defended the product.

"The increased volume of claims from customers over recent months clearly demonstrates that PPI is a product of real value, offering peace of mind and protection for consumers if their circumstances change and they become unexpectedly sick or unemployed," he said.

To handle the rise in claims the bank has set up an emergency claims team and is monitoring large-scale redundancies.